What is Deferred Revenue?

Why it's a liability
Deferred revenue and accounts receivable

Deferred revenue is money a customer pays you before you've delivered what they paid for. Because you still owe them the work or the product, it's recorded as a liability, not as revenue. As you deliver, you move the earned part out of the liability and into revenue. Deferred revenue is also called unearned revenue.

The open textbook Principles of Accounting, Volume 1 from OpenStax defines unearned revenue as an "advance payment for a product or service that has yet to be provided by the company; the transaction is a liability until the product or service is provided" (OpenStax, chapter 3 key terms, opened October 29, 2026).

Why it's a liability

OpenStax explains: "Since the company has not yet provided the product or service, it cannot recognize the customer's payment as revenue. At the end of a period, the company will review the account to see if any of the unearned revenue has been earned. If so, this amount will be recorded as revenue in the current period" (OpenStax, section 4.2).

OpenStax calls this kind of account a deferral: "prepaid expense and revenue accounts that have delayed recognition until they have been used or earned" (chapter 4 key terms). It's part of accrual accounting, where revenue is recorded when it's earned rather than when cash arrives.

Deferred revenue and accounts receivable

The two are opposites:

Deferred revenue: the customer has paid, and you haven't delivered yet. It's a liability.
Accounts receivable: you've delivered, and the customer hasn't paid yet. It's an asset.

Sample: recording a prepaid service contract

This is a sample with invented figures for a fictional business, Cedar Lane Design.

On March 1, a client pays $6,000.00 in advance for six months of website support, from March through August. Cedar Lane delivers the support evenly, so it earns $6,000.00 ÷ 6 = $1,000.00 each month.

March 1: the client pays in advance

Debit Cash $6,000.00
Credit Unearned Revenue $6,000.00

Cedar Lane has the cash, but it hasn't done any of the work, so the whole $6,000.00 is a liability.

March 31: one month of support has been delivered

Debit Unearned Revenue $1,000.00
Credit Service Revenue $1,000.00

Each entry's debit equals its credit.

Balances on March 31

Unearned Revenue (liability): $6,000.00 − $1,000.00 = $5,000.00
Service Revenue for March: $1,000.00
Cash received: $6,000.00

The same $1,000.00 entry repeats at the end of each month. After August 31, Unearned Revenue is $6,000.00 − (6 × $1,000.00) = $0.00, and the full $6,000.00 has been recorded as revenue. If the work isn't delivered evenly, the amount recognized each month follows what was actually delivered; ask your accountant how to measure it.

Tax timing can differ (US)

Book accounting and federal income tax can treat advance payments differently. The US Internal Revenue Service's Publication 538 (revised January 2022, opened October 29, 2026) says: "Generally, you report an advance payment for goods, services, or other items as income in the year you receive the payment. However, if you use an accrual method of accounting, you can elect to postpone including the advance payment in income until the next year. However, you cannot postpone including any payment beyond that tax year." The rules have conditions, so ask your accountant how they apply to you.

Where Billed fits

Billed's recurring invoices page describes retainers: "Negotiating fixed prices and sending recurring invoices makes it easier for you to forecast your income and upcoming workload." Billed's invoice software page says invoice reports show "which invoices are paid, partially paid or past due." When a client pays an invoice for work you haven't delivered yet, recording the deferral and recognizing the revenue as you deliver happens in your accounting records.

Frequently Asked Questions

Is deferred revenue a liability or an asset?

It's a liability. OpenStax describes unearned revenue as an "advance payment for a product or service that has yet to be provided by the company; the transaction is a liability until the product or service is provided."

When does deferred revenue become revenue?

When you deliver what the customer paid for. At the end of each period, you review how much has been earned and move that amount from the liability to revenue with an adjusting entry.

What is the journal entry for deferred revenue?

When the customer pays in advance, debit Cash and credit Unearned Revenue. As you deliver, debit Unearned Revenue and credit revenue for the amount earned.

Is deferred revenue taxed when you receive it?

For US federal income tax, IRS Publication 538 says: "Generally, you report an advance payment for goods, services, or other items as income in the year you receive the payment." It adds that if you use an accrual method, you "can elect to postpone including the advance payment in income until the next year." Ask your accountant how this applies to you.

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